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First-Mover Advantage? Maybe, But Be Smart About It

Don't let the hype fool you into thinking that being a first mover is easy (or fun). It often blows up. Here's how to avoid that fate.
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Every entrepreneur I know talks about being a first mover. Very few of them actually think deeply enough about what this really means. Unless you actually understand what it means to be a smart first mover-- and you carefully analyze how to fully take advantage of the competitive opportunity-- all your talk will have about as much impact on your business as whining does about the weather.

A better conversation focuses on the very good reasons not to be a pioneer. Pioneers aren’t automatically entitled to anything except maybe some arrows in their backs. If you don't have an ongoing strategy and a specific plan to exploit the opening you create by being ahead of the pack, as well as the ability to keep moving forward and raising the bar, all you've done is set the table for someone else to eat your lunch.

Why is it so tough to be first? Here are just a few of many reasons: You've got to learn about the new marketplace and its customers, and that exploration is expensive, uncertain, and time-consuming; without knowing what demand will be you have to invest and build the team and the delivery capacity in advance; you have to be able to respond quickly to buyers' changing needs and demands; in establishing the market you have to commit to certain investments and parameters (24/7 availability is one example), creating commitments that you have to stick to but that new competitors don't.

On the whole, not such a pretty picture, and I haven't even mentioned how easy it is for competitors to follow you and undercut your prices, and how easy it is for customers to jump ship.

Still, it can make sense to try to seize that first-mover advantage. But there are lots of factors that will ultimately determine how smart and successful a first mover you will be.

Here's what you need to focus on if you want to win.  

Hide the Ball from the Competition

As you scale the learning curve you have to everything you can to avoid educating your competitors and keep them from quickly (and more cheaply) imitating your product or service. Let them make their own mistakes and not learn the shortest paths and the best answers from watching your stumbles.

This gets tricky because you’ve got to weigh a bunch of competing considerations. First, your customers need product information and other assurances that you’re for real. Second, your investors and lenders (as well as future financiers like VCs, who couldn't keep a secret if their lives depended on it) need details, progress and performance reports, and even competitive information. And finally, you need to think about PR, marketing, and promotion because you've got to get the word out.

The Web adds an additional complication because the minute you put up a functioning site the whole world can see it, copy it, reverse-engineer it, and claim they can do it better. Frankly, most consumers can't tell the difference.

Small Can Be Beautiful 

Disruptive early entrants often succeed because their larger, in-market competitors may be unwilling to immediately cannibalize existing businesses and/or may be constrained by legal or regulatory considerations  (think AirBnb or Uber) or by other reasons such as concerns for near-term financial results.  In addition, it often takes large organizations a frighteningly long time to recognize, evaluate, and formulate a competitive response to new threats, particularly when a new player enters at the low end of the market.

The More the Merrier

As your production increases and your facilities and resources are more fully and efficiently utilized, economies of scale kick in. More important, in a market with limited overall demand new would-be players may not find enough customers to scale up to a size where they can compete effectively.

I’m A Veteran (Compared To You)

In addition to cost savings, the longer you are winning and servicing customers the more efficient and knowledgeable you become. Compliance issues, regulatory requirements, security, and confidentiality considerations all create new and highly effective barriers to new entrants.

Inertia Can Be a Wonderful Thing

When users find it costly or time-consuming to switch (even to a better product) the guy who got there first wins. High switching costs are usually associated with cases where (a) the products are expensive and long-lived (durable goods); (b) the buyer needs to make large co-investments; (c) it's expensive and time-consuming to seek out and evaluate alternatives; and (d)  buyers have to invest a great deal in training costs.

Your Brand Came First

Today, there are many products and services that the consumer can't accurately evaluate until they've been bought and used. So buyers adopt and rely upon shorthand references such as your brand equity and the length of time you’ve been around and equate these aspects of your reputation with quality and stability.

The User-Multiplier Effect

First movers get to ride the product adoption ramp and take advantage of the fact that certain products dramatically increase in value and utility as the number of adopters grows.  This is basically Metcalfe's Law of the compounding value of networks.  Products of this kind also create tremendous market pressure for standardization, which moves the market toward a de facto standard. It probably wasn’t much fun to be the only guy on the block with a fax machine and no one to fax to. And not too long along, the VHS video tape format killed the Sony Betamax because, when Sony refused to share or license its technology, other manufacturers all adopted the alternative VHS standard and it won the hearts and minds (and dollars) of the consumers.

Happy to Be Blue

As new buyers confront competing offers they face significant costs, time constraints, and other difficulties in evaluating them. Often they try to free-ride on the analyses of presumably better-informed players who have already signed up with the market leader. As they used to say: “No one ever got fired for buying IBM.”  

It's So Crowded No One Goes There Any More

Early entrants have less competition for advertising and distribution channels. As the market becomes more congested and competition for consumers' attention grows, everyone's messages get dimmer and it becomes far more costly to create and build customer awareness and/or to secure shelf space. Late entrants typically chase smaller niche opportunities or buy access and distribution through third parties.

The Price Is Right

First movers have the chance to choose the most attractive (typically high-end) positioning in a market, which then creates future opportunities to expand and diversify product lines at lower costs and with less competitive resistance. The premium pricing that early adopters are willing to pay (not to mention aggressive and influential word of mouth) creates self-fulfilling buzz and increased demand.

Choose Your Partner (Before Someone Else Can)

There are demonstrably better channels, representatives and distribution partners in every market.  Once they're spoken for, late entrants settle for the remnants and their prospects suffer by comparison. In some cases there are only a limited number of acceptable and appropriate strategic partners in a market, leaving no alternatives at all for those who didn't move first.  

First Movers Get First Dibs

First movers get the opportunity to control and lock up scarce facilities, end caps, websites, locations, suppliers, and other resources--including key personnel.  Slotting fees and other costs emerge later. Early on, these scarce assets are typically available at lower relative costs because the sellers/leasers don't initially appreciate future demand or the scarcity of their offerings.

Set The Standards--Literally

The chance to define, control, and continually advance product or service standards is invaluable. Frankly, the federal and state governments, by and large, no longer have the personnel, skills, or resources to regulate these matters in many industries. As a result, the smartest and fastest operators are seizing the initiative. And standards drive scale.

Scarcity, The Sequel

This is another way in which governmental shortcomings have created a void:  As the number of applicants, entrants, and competitive offerings in a market grows, the time, ability, and interest of various institutional parties, regulators, suppliers and other gatekeepers to deal with, support, and accommodate all potential players rapidly diminishes. Pressure mounts on new entrants to obtain connections and other access through existing players at much higher, brokered prices. Charges and costs emerge for validation and vetting actions, hook-ups, access to scarce personnel and services, or unique data feeds. That can dramatically raise operating costs for late entrants.

Stash Some Cash

You’re gonna make mistakes and have plenty of false starts. But first movers can command the higher margins associated with new, novel, and often scarce products (for a period of time) and this lets you build up cash reserves for the future price battles to come. In some cases it can enable you to do some early price-cutting to discourage other entrants.

IMAGE: Getty Images
Last updated: Feb 18, 2014

HOWARD TULLMAN | Columnist

Howard A. Tullman is the CEO of 1871 ? Where Digital Startups Get Their Start and the General Managing Partner of G2T3V, LLC and of Chicago High Tech Investment Partners. He is a member of the Chicago NEXT & Cultural Affairs Councils and the Illinois Innovation & Arts Councils; an adjunct professor at Kellogg; and an advisor to many start-ups. He is the former Chairman and CEO of Tribeca Flashpoint Media Arts Academy. Over the last 45 years, he has successfully founded more than a dozen high-tech companies. @tullman

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.



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